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China Can Learn from the Bursting of Japan’s Real Estate Bubble

Alicia Garcia-Herrero wrote . . . . . . . . .

As China enters its second year of real estate blues, much has been written about China Evergrande Group’s default potentially marking the country’s Lehman moment.

But in reality, China’s property troubles have little parallel with the U.S. subprime crisis in which a lack of domestic savings led American households to overborrow to purchase homes, fueling a market bubble.

In China’s case, its households had an excess of savings and a limited range of investment choices, due in part to the country’s capital controls. This resulted in captive demand for housing, which in turn led to overproduction of housing in all but the country’s biggest cities.

Japan’s experience in the 1980s and 1990s, when its macroeconomic imbalances resembled those of China today, is much more comparable.

Then, excess savings, reflected in a protracted current account surplus, fed asset bubbles, especially in terms of land prices. Aggressive financial deregulation, lax monetary policy and domestic investors’ bias toward the local market added to the inflation of Japan’s real estate bubble, as did the rapid appreciation of the yen after the 1985 Plaza Accord to address currency imbalances with the U.S. and key European economies.

When the property bubble burst, Japan’s response was too slow and piecemeal, which only worsened the economic impact. Regulators showed excess patience with domestic banks, which allowed their problems to worsen. The lack of a big bang to tackle their worsening balance sheets increased the crisis’ eventual cost, as the banks became overly conservative on taking on new risks, causing credit growth to stagnate.

As in Japan, China’s property bubble was partly the result of financial liberalization which enabled property developers to rely on the shadow banking sector to raise funds with less scrutiny than they would have faced from banks and other regulated lenders.

The key difference between the cases is that China was able to maintain a much higher economic growth rate than Japan as air started to come out of its bubble, giving Beijing greater margin for error.

But China’s continued lockdown-heavy approach to controlling COVID-19, as well as its aging population and falling returns on assets, point to slower growth rates ahead. Its room to deal with its real estate woes at its own pace will depend not only on the speed at which economic growth decelerates but also on how much more fiscal space remains.

The case of Japan shows that the deflationary impact of the bursting of a real estate bubble can quickly lower economic growth and also worsen a country’s fiscal position.

Between 1980 and 1991, Japanese economic growth averaged 4.3% while public debt came to just 66% of gross domestic product. But since the country’s bubble burst in 1992, growth has averaged just 0.7% and last year, public debt reached 263% of GDP.

While China’s growth still remains higher than Japan’s at this stage of their bubbles’ deflation, Beijing actually has less fiscal room as its public debt is relatively higher. As of 2021, its debt reached 83% of GDP but the figure would be much higher if the borrowings of state-owned enterprises were included.

The fact that consumer price inflation in China today is lower than in Japan, let alone the rest of the world, points to the rapid deflationary impact of the Chinese property market and will further impinge on debt sustainability.

Another important point to consider is that government revenues in both Japan and China depended heavily on land sales before their bubbles burst, particularly at the local level. The popping of Japan’s bubble worsened its fiscal position and the same is happening in China today.

Slower growth and a weakening fiscal position make it hard for China, as before with Japan, to continue to muddle along in addressing its real estate market troubles as cleanup costs are bound to increase over time. Solvent real estate developers are also targeted by households and investors. In addition, as banks are asked to continue to support developers, the line between solvent and insolvent lenders will become thinner, adding to the costs of restructuring.

In sum, while differences exist, Japan is probably the best example for China to watch when considering policy options for handling its real estate crisis. In fact, the underlying causes of the crises in the two countries, including macroeconomic imbalances and excessive financial liberalization, are similar.

Perhaps the most important lessons to draw from Japan’s handling of the demise of its real estate bubble are that time is of the essence and that slow intervention will only increase the economic costs of the crisis.

Japan’s case also shows that policymakers should not rely too much on economic growth or fiscal room as a cushion for real estate woes since both will be hammered down by plummeting land and real estate prices.

Source : Nikkei Asia

Revisiting the Anatomy of a Bubble

Jeremy Grantham’s recent piece, Let the wild rumpus begin, argued that the US is in its 4th “superbubble” of the last 100 years and is in its final stages. This inspired us to refresh our bubble framework (below, taken from our 2017 blog post). Many valuation measures of the US equity market are near historic highs and with the Fed about to tighten monetary policy, investors should naturally be skeptical of US equity allocations.

In Kindleberger’s classic, Panics, Manias and Crashes, he expands on earlier work by Minsky in Stabilizing an Unstable Economy. They found that no two bubbles are alike, but they all share a common structure. Below we’ve summarized the five key stages of market bubbles that allow you to identify them as they happen.


Bubbles start with a displacement, some sort of a shock to the system. A displacement could be war (usually the end of war), a major political change, deregulation, a technological innovation, a financial innovation or a shift in monetary policy. The displacement creates a new opportunity in at least one sector of the economy. One example is the widespread adoption of computers, the internet and email in the US in the 1990s, which set the stage for the dot-com bubble.


A boom begins, especially in the favored sector, as optimism grows. There is a positive feedback loop as the price of stocks, one or more commodities, and/or real estate increase, which then leads to greater consumption and investment, which leads to greater economic growth. Credit fuels the boom. Borrowers become more willing to take on debt and lenders are increasingly willing to make riskier loans as economic prospects improve.

This expansion of credit isn’t necessarily provided by banks. The Tulip Mania in 1636 in Holland, for example, was fueled by vendor-financing from bulb sellers. However, banks have been the predominant source of credit since the 19th century. Banks can expand credit further and more rapidly than vendors could. To make matters worse, new banks are often formed in the expanding economy. This causes banks to further loosen their credit standards to avoid losing market share.


A boom transforms into euphoria as “rational exuberance morphs into irrational exuberance.” There are hundreds of books documenting the endless possibilities of the economy (e.g. Japan as Number One and The East Asian Miracle in Japan in the 1980s, and Dow 40,000 in 1999). Participants extrapolate recent price increases into the future, expecting prices to continue to increase at unsustainable rates. Some, especially industry insiders, realize that there is a bubble, but many continue to participate in the market, believing they can sell to “the greater fool” before the implosion.

However, more and more euphoric outsiders begin to enter the market as media attention grows and individuals see others getting rich. As Kindleberger quoted in Manias, Panics and Crashes, “there is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.” The rush of capital causes a further increase in prices, and sound investment shifts to wild speculation. Individuals invest with the hope of short-term capital gains, and debt compounds as people borrow or trade on margin to further speculate. Money seems free. Fraud is also common at this stage, although it typically is not exposed until later.


At some point, an event hits that causes a decline in confidence and a pause in the explosive price increase. The event could be a bankruptcy, a change in government policy, a piece of news (real or rumored), or a flow of funds from the country. The response to these events differs in bubbles because of the debt build-up. People who financed their purchases with borrowed money become distressed sellers as the income on their assets drops below their interest payments. Kindleberger noted, “The economic situation in a country after several years of bubble-like behavior resembles that of a young person on a bicycle; the rider needs to maintain forward momentum or the bike becomes unstable.”

A slowing bike is actually a better metaphor than a bubble. Sometimes panic sets in immediately, but in other cases it can take up to several years for the crisis to fully develop. In the dot-com crisis, panic happened almost immediately, while it took a few months for panic to set in during the Great Financial Crisis.


Not everyone realizes that a crisis is unfolding at the same time. Insiders and institutional investors usually sell first. Once other market participants realize the gravity of the situation (perhaps after another major event), run-of-the-mill selling turns into outright panic as everyone tries to get out at the same time. Prices plummet and levered companies increasingly go bankrupt as they can’t meet their interest payments. The sell-off typically spreads to other sectors and other countries. As bankruptcies mount, banks can begin to fail, further drying up credit when it’s needed the most. The panic continues until a lender of last resort convinces investors that cash will be made available to meet demand, or prices fall so low that value investors start to buy back in.

Source : Variant Perception

China Will Not Be Able To Offset Its Property Bubble Easily

Daniel Lacalle wrote . . . . . . . . .

No economy has been able to ignore a property bubble and even less so offset it and continue to grow replacing the bust of the real estate sector with other parts of the economy. Heavily regulated economies from Iceland to Spain have failed to contain the negative impact of a real estate sector collapse. It will not be different in China.

China’s real estate problems are three: The massive size of the sector, its excessive leverage, and the amount of developer debt in the hands of average households and retail investors.

According to The Guardian, “China’s real estate market has been called the most important sector in the world economy. Valued at about $55tn, it is now twice the size of its US equivalent, and four times larger than China’s GDP”.

Considering construction and other real estate services, the sector accounts for more than 25% of China’s GDP. Just to consider other previous examples of property bubbles, the average size of the sector was somewhere between 15 to 20% of a country’s GDP. And none of those economies managed the excess of the property sector.

Of course, the problem of a real estate bubble is always excessive leverage. Developers take too much debt and the smallest decrease in housing prices makes their equity vanish and their solvency ratios collapse.

In the case of China, the level of debt is simply staggering. According to Messari Capital Securities, the average net debt including minority interests of the fifteen largest Chinese developers stands at 60% to total assets. Evergrande is not even the most indebted. The three largest developers stand at more than 120% net gearing. The top ten most indebted Chinese developers amply surpass the level of debt to assets that made Spain’s Martinsa Fadesa collapse.

Chinese and foreign retail investors are also heavily exposed to the real estate and construction market. Evergrande was the biggest issuer of commercial paper and developers’ debt was sold to small investors in different packages. Furthermore, Chinese families have around 78% of their wealth tied up in property, more than double the U.S., according to a 2019 study by Chengdu’s Southwestern University of Finance and Economics and BloombergQuint. China has also launched nine REITs (Real estate Investment Trusts) that raised more than $5 billion in just a week in over-subscribed offerings in a market that could reach $3 trillion, according to Bloomberg.

These three factors mean that it will be impossible for China to contain a bubble that is already bursting. According to the Financial Times, prices of new homes across China’s biggest cities fell in September for the first time since April 2015. New home prices dropped in more than half of the seventy cities relative to August.

With high leverage, prices that have risen massively above real GDP and real wages, and a population that is heavily exposed to the sector, the impact on China’s economy will be much more than just financial. Even if the PBOC tries to disguise the fiscal impact with liquidity injections and bank direct and indirect bailouts, the real estate bubble is likely to hit consumption, utilities that have built infrastructure around empty buildings, services and sectors that manufacture parts for construction.

The Chinese government may contain the financial implications, but it cannot offset the real estate sector impact on the real economy. This means weaker growth, higher risk, and lower consumption and investor appetite for China exposure. Furthermore, the central bank cannot solve a problem of solvency with liquidity.

Property bubble-driven growth always leads to debt-driven stagnation.

Source : Daniel Lacalle

Gap Between Change in U.S. House Prices and Owners’ Rent Exceeds the Last Bubble Levels

Source : The Carson Report

How Easy Money Creates the Boom-Bust Cycle

Frank Shostak wrote . . . . . . . . .

According to the popular way of thinking, various economic data can provide an analyst with the necessary information regarding the state of the economy. It is held that by inspecting various economic indicators such as the gross domestic product or industrial production, an analyst could ascertain the state of the economic business cycle.

Following the experts from the National Bureau of Economic Research (NBER), business cycles are seen as broad swings in many economic indicators, which upon careful inspection permit the establishment of peaks and troughs in general economic activity.

Furthermore, according to the NBER experts, because the causes of business cycles are complex and not properly understood it is much better to focus on the outcome of these causes as manifested through the economic data.1

If the driving factors of boom-bust cycles are not known, as the NBER underlying methodology holds, how could the government and the central bank introduce measures to counter them?

Contrary to the NBER way of thinking, data does not talk by itself and never issues any “signals” as such. It is the interpretation of the data guided by a theory which generates various “signals.”

By stating that business cycles are about swings in the data, one says nothing about what business cycles are. In order to establish what business cycles are the driving force that is responsible for the emergence of economic fluctuations needs to be ascertained.

Why We Have Boom-Bust Cycles

Contrary to the indicators approach, boom-bust cycles are not about the strength of the data as such (for instance, for the NBER a recession is a significant decline in activity spread across the economy lasting more than a few months). It is about activities that sprang up on the back of the loose monetary policies of the central bank.

Thus, whenever the central bank loosens its monetary stance, it sets in motion an economic boom by means of the diversion of real savings from wealth generators to various non-wealth-generating activities that a free unhampered market would not facilitate.

Whenever the central bank reverses its monetary stance, this slows down or puts to an end the diversion of real savings toward activities that do not generate real wealth and that undermines their existence. The trigger to boom-bust cycles is central bank monetary policies and not some mysterious factors.

Consequently, whenever a looser stance is introduced, this should be regarded as the beginning of an economic boom. Conversely, the introduction of a tighter stance sets in motion an economic bust, or the liquidation phase.

The severity of the liquidation phase is dictated by the extent of distortions caused during the economic boom. The greater the distortions, the more severe the liquidation phase is going to be. Any attempt by the central bank and the government to counter the liquidation phase through monetary stimulus will only undermine the pool of real savings, weakening the economy.

Again, since the central bank’s policies set the boom-bust cycles in motion, these policies are what leads to economic fluctuations.

Whenever the central bank changes its monetary stance, the effect of the new stance does not assert itself instantaneously—it takes time.

The effect starts at a particular point and shifts gradually from one market to another market, from one individual to another individual. The previous monetary stance may dominate the economic scene for many months before the new stance begins to assert itself.

Economic Slowdown versus Recession

As a rule, the symptoms of a recession emerge after the central bank tightens its monetary stance (there is a time lag). What determines whether an economy falls into a recession or just suffers an ordinary economic slowdown is the state of the pool of real savings.

As long as this pool is still expanding, a tighter central bank monetary policy will culminate in an economic slowdown. Notwithstanding that various non-wealth-generating activities will now suffer, overall economic growth will be positive, the reason being that there are more wealth generators versus wealth consumers. The expanding pool of real savings reflects this. As long as the pool of real savings is expanding, the central bank and government officials can give the impression that they have the power to undo a recession by means of monetary pumping and artificially lowering interest rates.

In reality, however, these actions only slow or arrest the liquidation of activities that emerged on easy monetary policy, thereby continuing to divert real savings from wealth generators to wealth consumers.

What in fact gives rise to a positive growth rate in economic activity is not monetary pumping but the fact that the pool of real savings is still growing. The illusion that through monetary pumping it is possible to keep the economy going is shattered once the pool of real savings begins to decline. Once this happens, the economy begins its downward plunge, i.e., falls into a recession.

The most aggressive loosening of money will not reverse the plunge. In fact, rather than reversing the plunge, loose monetary policy will further undermine the flow of real savings and thereby further weaken the structure of production and thus the production of goods and services.

In his writings, Milton Friedman blamed central bank policies for causing the Great Depression of the 1930s. According to Friedman, the Federal Reserve failed to pump enough reserves into the banking system to prevent the collapse in the money stock.2 The collapse in the money stock according to Friedman was the key factor in plunging the economy into economic depression.

For Friedman, the failure of the US central bank was not that it caused the monetary bubble during the 1920s but that it allowed the deflation of the bubble.

An economic depression, however, is not caused by the collapse of the money stock, as suggested by Friedman, but rather by the collapse of the pool of real savings. The shrinkage of this pool is set in motion by the preceding monetary pumping of the central bank and by fractional reserve banking.3 The monetary pumping sets in motion an exchange of nothing for something, i.e., consumption without preceding production—this undermines the pool of real savings.

Moreover, a fall in the pool of real savings triggers declines in bank lending out of “thin air” and thus in the money stock. This in turn implies that previous loose monetary policies cause the fall in the pool of real savings and trigger collapses in economic activity and in the money stock.

Declines in the prices of goods and services follow declines in money supply. Most economists erroneously regard this as bad news that must be countered by central bank policies. However, any attempt to counter price declines by means of loose monetary policies will further undermine the pool of real savings. Furthermore, even if loose monetary policies were to succeed in lifting prices and inflationary expectations, this could not revive the economy while the pool of real savings is declining.

Lastly, it is erroneous to regard a fall in stock prices as causing recessions. The popular theory argues that a fall in stock prices lowers individuals’ wealth, which in turn weakens consumers’ outlays. Since it is held that consumer spending accounts for 66 percent of GDP, this means that a fall in the stock market plunges the economy into a recession.

Again, we hold that it is the pool of real savings and not consumer demand which permits economic growth to take place.

Furthermore, the prices of stocks mirror individuals’ assessments regarding the facts of reality. Because of monetary pumping, these assessments tend to be erroneous. However, once the central bank alters its stance, individuals can see much more clearly what the facts of reality are and scale down previous erroneous evaluations.

While individuals can change their evaluations of the facts, they cannot alter the existing facts, and the latter influence the future course of events.

Source : Mises Institute

The Rise of U.S. Long Bond Yield May Burst the Stock Market Bubble

U.S. 10-year Yield

See large image . . . . .

Since early 2018, a rise in the long bond yield has sent shudders through the stock market on four occasions: February 2018, October 2018, April 2019, and January 2020. On all four occasions, the tipping point was the earnings yield premium on tech stocks versus the 10y T-bond yield falling towards its lower limit of 2.5 percent.

See large image . . . . .

Source : Reuters and BCA

Asymmetric Bubble Pattern at Bull Market Peak in History

See large image . . . . . .

Source : Real Investment Advice

Government Finance Quasi-Capitalism

From Doug Noland …..

Bond yields shoot to two-year highs and equities take notice …….

Minsky saw the evolution Capitalist finance as having developed in four stages: Commercial Capitalism, Finance Capitalism, Managerial Capitalism and Money Manager Capitalism. “These stages are related to what is financed and who does the proximate financing – the structure of relations among businesses, households, the government and finance.”

Commercial Capitalism: “The essence of commercial capitalism was bankers providing merchant finance for goods trading and manufacturing. Financing of inventories but not capital investment.”

Early economic thinkers focused on seasonal monetary phenomenon. Credit and economic cycles were prominent, although relatively short in duration.

Finance Capitalism: “Industrial Revolution and the huge capital requirements for durable long-term capital investment… The capital development of these economies mainly depended upon market financing. Flotations of stocks and bonds – securities markets, investment bankers and the Rothchilds, JP Morgan and the other money barons… The great crash of 1929-1933 marked the end of the era in which investment bankers dominated financial markets.”

Managerial Capitalism: “During the great depression, the Second World War and the peace that followed government became and remained a much larger part of the economy… Government deficits led to profits – the government took over responsibility for the adequacy of profits and aggregate demand. The flaw in managerial capitalism is the assumption that enterprise divorced from banker and owner pressure and control would remain efficient… As the era progressed, individual wealth holdings increasingly took the form of ownership of the liabilities of managed funds…”

Money Manager Capitalism: “The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy… Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits… A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market…”

Late in life Minsky wrote “Today’s financial structure is more akin to Keynes’ characterization of the financial arrangements of advanced capitalism as a casino.”

The above quotes were from a Minsky paper published in 1993. That year was notable for the inflation of a major bond market speculative Bubble. This Bubble began to burst on February 4, 1994 when Fed raised rates 25bps.


In 2001, developments compelled me to update Minsky’s “stages of development of Capitalistic Finance:” “Money Manager Capitalism” had evolved into what I termed “Financial Arbitrage Capitalism.” Traditional money management had given way to the rise of sophisticated market-based financial instruments and financing arrangements. In particular, the new financial and policy backdrop had created auspicious market incentives and financial rewards for leveraging in high-yielding ABS and MBS. This fostered a proliferation of spread trade and myriad sophisticated derivative strategies – all working to fuel asset inflation and Bubbles. Importantly, enormous easy-money speculative profits were increasingly divorced from economic returns in the real economy. Finance, generally, was becoming progressively detached from the real economy.


In an April 2009 CBB, I began chronicling the “global government finance Bubble.” This Bubble has made it to the foundation of contemporary “money” and Credit – to the perceived safest Credit instruments. At home and abroad, governments and central banks have assumed prevailing roles in both the markets and real economies.


After much contemplation, I’ve decided it’s again appropriate to update Minsky’s “Stages of development of Capitalist finance.” A couple decades of Financial Arbitrage Capitalism left deep scares in the financial system. The federal government was compelled to essentially nationalize mortgage Credit. To sustain market confidence in the massive overhang of private-sector Credit has required ongoing unprecedented fiscal and monetary stimulus.

Financial Arbitrate Capitalism has also left a deeply maladjusted economic system. It’s an economic structure that requires enormous ongoing Credit expansion (neighborhood of $2 TN annually). The economy is highly unbalanced, with ultra-loose “money” spurring record securities prices and the return of bidding wars in some housing markets – while Detroit files for bankruptcy and 47 million receive food stamps. It’s an economy that runs perpetual trade and Current Account Deficits. The financial backdrop incentivizes stock buybacks, special dividends and cost cutting – as opposed to investment in productive plant and equipment.

I’ll posit that evolution to a consumption and services-based economic structure is an evolution to Credit gluttony. With households highly leveraged and the private sector unable to expand Credit sufficiently to power our structurally deficient economic structure, Credit expansion/inflation it is left to the federal government and the Federal Reserve.

This backdrop has spurred massive Federal deficits, zero interest rates, and unprecedented central bank monetization. Washington policies spur further wealth redistribution and, I would argue, wealth destruction. I’m going to call the new “Minsky Stage” – “Government Finance Quasi-Capitalism” (GFQC).

The government now essentially determines market yields throughout the entire Credit system. The government now basically insures system mortgage Credit and sets mortgage borrowing costs. Massive federal deficits and low Fed-dictated borrowing costs sustain inflated corporate earnings and cash-flows. The Fed has come to believe it is within its mandate to inflate securities and asset prices. It has crushed returns on saving instruments. Amazingly, the Fed believes it is within its mandate to dictate that savers flee the safety of deposits and other “money” for the risk markets.

“Government Finance Quasi-Capitalism” exacerbates fragilities. It fosters ongoing Credit excesses including a historic expansion of non-productive government debt. GFQC and the resulting flow of finance exacerbate imbalances and economic maladjustment. Accordingly, resulting financial and economic fragilities ensure an even bigger role for Washington in the real economy and for the Federal Reserve in the financial markets.

Source: Safe Haven

U.S. Farmland Bubble

Price Since 2002

Australia Housing Bubble

Australia 8-City RPP Index Since 1987